The Tough Love School of Life…

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You have read the numbers. Half of all Americans do not have $1,000 to $2,000 in savings for an emergency. Forty percent of Americans do not have a retirement account and the same percentage, 40%, do not pay off their credit card every month. The balance on these cards not paid off monthly is about $9,000 and at an average interest rate of 18%, interest alone is $135 a month before you even make a dent in the principal.

You could sit down and rationally explain to people that they need a detailed budget and they need to stick to it. Its simple, spend less than you earn. Sounds sensible, sounds logical… but close to impossible for many. The thrill of spending and the persuasive power of American advertising is just too great. Some folks need a more radical, tough love approach. Dave Ramsey has made a career of preaching tough love in finance, both through his radio show and through books such as his “The Total Money Makeover” (2003) which has sold 5 million copies.

What’s his solution? It requires going cold turkey (see below), cutting up your credit cards, paying for everything in cash and if you don’t have cash, don’t buy. Focus immediately on building an emergency savings account of $1,000. Then start the ‘debt snowball’. List your debts in order from smallest to largest and attack the smallest first, making minimum payments on the rest. Then when the smallest balance is paid off you attack the next smallest debt. This is not conventional wisdom which recommends paying off the highest interest rate debt first, then the next, and so on. Ramsey argues that people need to see small victories to stay on course so going after the smallest balance first makes sense.

After your consumer debt has been paid off you build an emergency cushion equal to three to five months of expenses, you invest 15% of your gross salary in a retirement account (no compromising here) and finally move on to the longer-term issues on the list.

How effective is this program? Like losing weight and stopping smoking, it is tough. Some can do the Baby Steps on the first try but others will have to try again or try something completely different. Consumer debt (including college debt) is a real problem today. A significant number of Americans have not had an inflation adjusted pay raise in ten to fifteen years. Life is indeed tough. What’s your plan?




What’s in Your Wallet?...

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Just when you thought you could forget about Bitcoin…it’s back. Bitcoin is a digital currency that is free from any influence by central banks. Libertarians like it for it’s independent, secure and untraceable features. But for a whole slew of reasons Bitcoin has not taken off as a medium of exchange.

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One problem is volatility. The price of Bitcoins soared in 2017 only to crash a year later. When you have crypto currency in your ‘wallet’ and you are ready to buy something, you want it to have a stable value. It doesn’t. Facebook will use the proceeds from selling ‘Libras’ (its cryptocurrency) to purchase Government securities insuring the full backing of the currency and tying its value to a basket of world currencies. The cost to make purchases or transfer funds should be much cheaper than the 2-10% you pay Western Union or MoneyGram today. Facebook touches about a third of the entire world population today and the prospect of Libra users ‘facebooking, instagraming, what’s apping’ and then, shopping and transferring money, all on one site, is a business worth drooling over. The Chinese have already designed a system like this (Tencent’s WeChat and Alibaba’s Alipay), where users stay all day, texting, surfing the internet, playing video games and shopping. Facebook wants its share of the action.

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Banking the unbanked has also been a success in places you might not expect. In Kenya, the phone companies saw plenty of commerce but few ways to move money around. So, they designed M-Pesa where you load balances on your cell phone and text money to creditors who can convert to cash at small convenience shops or send the money on to other creditors. The phone companies suddenly become banks. Facebook is looking to do the same.

This is a slam dunk, right? Not so fast. Big hurdles await Mr. Zuckerberg. The first is the issue of privacy. The public is not too excited about all the information Facebook has accumulated already and sold to others. Do we really want to give them more information? Secondly, governments around the world are not too excited about an alternate monetary powerhouse developing. Is it a bank, is it a payment system (ala Visa or Mastercard), and since it is anonymous, what about the criminal money transfer aspect to the platform?

We don’t know if Libra will get off the ground, but disruption is coming quickly to the money business. Commerce will get cheaper and more efficient, but the price we pay may be the continued erosion of our precious personal freedoms. Caveat Emptor.




Things That Have Crossed Our Desk…

Health Care is a Big Number.

There is nothing more Rube Goldberg-esque than health care in America. It is one scaffold stacked on top of another scaffold. No one would ever create this system from scratch. But so be it, we have to play the hand we’re dealt.

The good news is health costs have been rising at a slower rate recently, from double digit increases to slightly more manageable levels. In addition the public seems satisfied with Medicare and Medicaid. It’s the devil you know versus the devil you don’t know. Medicare is complicated what with all the deductibles, co-pays and co-insurance but most of us have mastered the lingo well enough that we don’t want to learn something new. It would probably be even more complicated and confusing.

The health insurance price tag, however, is still significant. Medical prices have consistently gone up faster than the general rate of inflation. Money Magazine estimates that the typical 65 year old couple retiring this year will pay $11,752 in health care costs. This includes premiums on Medicare (both Parts B and Part D - drug coverage) and all copayments, deductibles and other out of pocket expenses. It also includes dental care which Medicare doesn’t cover. By age 85 the typical annual medical cost in today’s dollar goes to almost $32,000.

Caveat Emptor, these costs do not cover long term care either in the home or in a facility. And these costs are a biggie since so much of health care spending occurs in the last year or two of life. Our only advice: stay healthy!

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What’s in a Name Anyway?

In China I guess a lot is involved in a name. Hainan Island, the “Hawaii of China” is at the very southern tip of the country. Hainan has oodles of resorts and hotels and many use old world European names to spice up their image. But China is getting more nationalistic and Hainan officials are taking the lead, threatening to eliminate the “worship of foreign things” and replace “feudal” names with Chinese monikers. The JinJiang Group, a Chinese company with over 10,000 hotels worldwide uses names like “Victoria” and “Heidelberg” for some of its “Vienna” brand hotels. Hainan officials want these names “rectified,” although what “rectified” means is still very unclear. Even names associated with China’s imperial past such as “Coral Palace” and “Imperial Garden District” are thought to be no-nos.

This got us thinking about where this blame-game-in-names might end. The Trump Organization has registered dozens of trade names in China including Trump Estates, Trump Plaza, and, of course, Trump Tower. What if these get on China’s no-go list of names. And how do we respond? Does Washington fight back by forcing a renaming of “General Tso’s Chicken” in 10,000 Chinese takeout restaurants across the U.S.? It’s a complicated world.


The Wall Street Journal, Then and Now…

 The Wall Street Journal (WSJ) published a special issue on July 8 commemorating the 130th anniversary of the first edition, July 8, 1889.  In my estimation, the WSJ, along with The New York Times and The Economist are the three absolute best publications.  Read them.  

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A lot has changed since 1889, including the price of The Wall Street Journal (see chart), up 1% a year after adjusting for inflation. The special issue pulls together snippets of the most memorable articles of the last 130 years.  The German invasion of France in World War I (1914) is there, as is the Japanese attack on Hawaii (1941), the breakup of Standard Oil (1911) and AT&T (1983), and cultural events such as the British invasion (1964) and the oil gas lines of 1973. And, of course, there are articles about the rise of today’s super giants including Microsoft (1987), Amazon (1996) and the first Apple cellphone (2007) which, amazingly is only just over ten years old.

On the investment front there is the roller coaster stock crash of October 1987, the birth of the credit card (1959) and ATMs (1972), and the fragile financial shape of Social Security, which was commented on as far back as 1975.

Three important articles for individual investors also caught my eye. First, saving for retirement was as important then as it is now. In 1995 the Journal wrote that Baby Boomers had saved little and many would run into trouble in retirement. The same story is being written today about Millennials and Gen Z. Traditional pensions have gone away and saving for retirement is very much Job One.

A second article reminds us that “history may not repeat itself but it does rhyme.” Nearly three decades ago Japan was the economic juggernaut, the “Sputnik of the 1990s.” Nothing was going to stop them economically just as nothing was going to stop the Russian space prowess of the 1960s. Well things didn’t pan out exactly as feared. Today the worry is China. Its economic might is real but remember one’s worst fears and greatest hopes generally don’t come about. Keep historical perspective. 

A final article is from 1972. The Dow finally broke through 1,000 on November 15.  Today the Dow is near an all-time high of over 27,000. If you do the math this works out to a 7.2% average annual increase. When you add in an annual dividend of between 21/2 % and 4%, you come up with a total rate of return of 10% or more.  An impressive result amidst all the conflict and confusing events.

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Fifty years from now what will the Special Issue of the WSJ look like? Obviously I have no idea. But we can assume there will continue to be plenty of scary stories, wars will be fought, new products will emerge, old (and new) companies will fail and yes, there will be market crashes. But the U.S. economy has always had an incredible talent for self-renewal and without being too cocky or overconfident, I think this strength will continue.

The investment takeaway from the 130th Special Issue is don’t be the investor in the drawing above. Buy good companies at attractive prices and then, and this is the hard part, hold them through thick and thin. Get rich slowly.